Should I Fix My Home Loan in 2022?

With the Reserve Bank of Australia (RBA) tipped to increase the cash rate as early as August this year, is 2022 the right time for Aussies to lock in a fixed home loan rate, before even further rises?

Over the past two years, a plethora of everyday Aussies have jumped on the property bandwagon despite high property prices, in order to take advantage of some of the lowest and most competitive fixed home loan rates in the nation’s history.

Why did this happen? Well, you could say it was all thanks to the RBA’s record-low interest rates – the official cash rate is sitting at a record-low of 0.10%. However, now that the RBA is signalling a possible rise in the not-too-distant future, we may well expect to see interest rates on many fixed home loans (both long and short) rising across the board along with this.

While it can often be notoriously hard to predict the housing market, it may be the case that the low fixed rates we saw throughout 2021 will be off the table in 2022, especially as property price growth appears to be slowing overall.

With all this in mind, the question still lingers: Is 2022 the right time to fix your home loan?

A fixed home loan has a defined, unchanging interest rate during the fixed-rate term, which can give you a peace of mind that the required repayment amount will be the same during this initial period.

In most cases, at the end of the fixed term (typically from one to five years), your loan will instantly roll over to a variable rate, unless you agree with your lender to repeat the process by ‘rolling over’ the fixed term.

If you choose to make changes to your loan agreement during this time – for example, choosing to break out of a fixed rate home loan early – then you may be subject to costs such as break fees.

Depending on the size of your loan, interest rate movements and loan terms, these fees can easily be thousands of dollars.

Whether it is better to have a fixed or variable rate loan is completely up to the individual to do their own risk assessment based on their own personal situation and determine how changes in the market may impact their ability to make repayments.

From an interest rate perspective, fixing your home loan this year could potentially allow you to save more money than if you were to choose the variable rate option. In simple terms, the reason for this is that the Federal Government influenced the drop in fixed rates as they issued reduced three-year government bonds to banks that lessened their fixed rates compared to variable rates. Effectively, this may result in banks being able to offer fixed rate loans at a lower cost than they otherwise would – perhaps on a comparable level to how fixed rate loans appeared in 2019. Canstar data shows many lenders have hiked their fixed interest rates in recent months, but at the time of writing shorter-term fixed rates still tend to be cheaper on average than a typical variable rate loan.

However, obtaining a fixed loan is not always the right option for everyone, especially in this turbulent economic climate. Fixed home loans are generally less flexible and often don’t allow for extra repayments, which means they aren’t always a positive for all Aussies. Bear in mind as well that if a lender cuts its interest rates, you won’t benefit from these drops while you’re on a fixed rate home loan.

Fixing part of your loan with a split loan is also a viable option that can still provide partial protection from sudden rate hikes and arguably gives you the best of both worlds – the stability of a fixed rate and the flexibility of a variable rate.

There are a few reasons why some Aussies opt for a fixed rate, over variable or split options. These include:

• If interest rates are low, you’re able to lock this in and ensure you’re protected if interest rates suddenly rise during the fixed term.
• You have predictable payments each month, which in turn can help you to budget effectively and stay on top of repayments.
• Your minimum repayments won’t change throughout the duration of the agreed fixed term.

On the other hand, some of the reasons borrowers may prefer a variable rate home loan include:

• Moneysmart notes that variable loans tend to have more features than fixed ones – for example, offset accounts and redraw facilities tend to be more common on variable loans.
• It may be easier or cost less money to switch loans in future if you’re on a variable loan.
• Depending on the fixed term(s) and products you’re considering, it’s possible a variable rate may be cheaper in the short-term.

Most providers allow you to pick your period that you would like to fix your interest rate to, which can generally be anywhere between one to five years and may depend on the total amount you’re borrowing and other loan terms.

The duration of how long the rate is fixed for is totally up to the individual and what they can afford, but it’s important to remember that interest rates will vary depending on the length of the term for which you fix. As a general rule, the longer a loan is fixed, the more interest you might expect to pay for the security that comes with locking in a home loan rate.

While some banks and home loan providers have already started to raise their fixed home loan rates, many Aussie home-buyers may well be thinking that it’s time to fix their rates, perhaps seeking to get in before it’s too late and out of reach in terms of affordability should interest rates rise further.

If you are interested in making the switch to a fixed loan, it’s important to weigh up your options and do your research into the rates available from banks and home loan providers. You can also opt to use a mortgage calculator to determine what switching loans will cost you in fees and how it could potentially impact your repayments.

Chad Hoy Poy is the National Lending Manager at WLTH, who has 15 years of experience in leadership, account management and business development within lenders and finance businesses. He is interested in growth discussions, assisting start-ups to reach business success, and using technology to its potential. You can find Chad on LinkedIn.

Cover image source: Dean Drobot/Shutterstock.com. 

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